October 2013

10/28/2013

Let's say I was your business partner or an investor in your business. But I am not involved in the day-to-day operations.

I mention to you that I noticed we showed a profit of $100,000 last month but our cash balance actually went down by $60,000. So I ask you to update me on our cash flow for last month. I ask "What happened to the cash last month"?

Could you answer that question (in a fairly big picture fashion) in a 2-minute conversation?

If you can, then you understand your cash flow. If you can't, then you don't really know what happened to the cash last month. That's scary… really scary!

Happy Halloween J

My post here about the Cash Flow Focus Report will help you fix the problem (if you're not sure what happened to your cash last month).

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10/23/2013

I wrote a post on my Freedom From Student Loans blog recently about buying your next car with cash rather than borrowing the money. It got a flood of responses and comments.

This is more of a personal finance topic than business finance, but I thought it would be fun to share the post with you and get you thinking about the subject.

Here is how I started the post:

"I bought my first car with cash back in 1999. I can't tell you how proud I was to finally buy a car without borrowing the money to do it. (And I still have that car today. It just crossed the 240,000 mile mark!)

Here are two important questions to ask yourself.

Do you think it is possible to own a car without having a car note?

Have you set a goal to buy your next car with cash?

Your answers to those two questions can have a big impact on your financial future. Not so much because of the dollars involved. But more because of the impact it can have on your whole approach to money, debt and mature decision making."

Many of the comments came from a LinkedIn group for CPAs. The comments fell into two categories. The first was those who had started buying their cars with cash (no car note) and were proud of it. The second was from those who argued that when you can borrow at low rates you should do it and use your cash either for emergencies or for investments.

Here are two comments in the first category:

"I paid cash on 3 of my last 4 vehicles. I had the money for the first 2, financed my third car (6 very long years), and paid cash for the most recent one. I was able to do that, because my husband and I set aside money from every one of my paychecks for a slush fund. We had no trouble writing a check. Get the most from a car; drive it into the ground. My 2nd and 3rd vehicles each had well over 150K miles on them. My current vehicle is used, and we did the math on expected additional miles and how much they were. The $10K for a used vehicle was a bargain."

"Paying cash will save most people more money. Most people tend to buy less car when they pay cash. I see all the 0%, lease, and opportunity cost arguments above, but they mostly seem like rationalizations to buy more car."

I'm in the buy your car with cash group.

To me, one of the most compelling reasons to buy cars with cash is it helps link the pain of giving up a portion of my assets (cash) with the pleasure of having the car. With debt or leases, it is really a way to get the benefit (the car) and not make the cost seem quite so painful.

People would be more likely to buy something they can actually afford if they used their cash. Debt makes it feel like you are not really giving up something that is special to you.

But I am more conservative than most people. And I focus on growing a net worth that is big while at the same time reducing risk (reducing debt/leverage). Many people see that as a conflict. But it has worked very well for me over the years.

Here is a comment in the second category:

"You should generally not pay cash for a car unless the interest rate you would pay for financing is higher than the interest rate you would make investing the cash. I just bought a car with 1.9% interest. I put down 20% (to keep my DTI ratio at a certain level) and financed the rest. I easily had the money to pay for the car in cash but choose to keep my cash in my investments where I earn a lot more than 1.9% a year."

I agree the math would work in that logic. The problem comes in a couple ways. One is that if investments only went up then a lot more people in America would have a very strong net worth. There is risk inherent in using debt to make investments. Leverage works great when it works... and it chops heads off when it doesn't.

And while math is important in lots of areas, my experience is buying smart is more about discipline and not buying things a person can't afford (rather than financial engineering). Using debt for an auto purchase destroys value over time and leads too many people into lifelong debt (they start to think using debt for most purchases is smart).

But it is mostly smoke and mirrors. And for young people, the smoke and mirrors ends up making them feel better about something that actually destroys their net worth over time. They buy more car than they can really afford and they never have to confront what they are doing to themselves financially. That mentality then pervades other areas of their life.

A strong net worth and no debt creates a level of freedom that many people would cherish if they only gave themselves a shot at it.

I'm a "debt free is the way to be" kind of guy so I am on one side of the spectrum for sure. And my measure of financial success is net worth… which I recognize is not everyone's goal.

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10/14/2013

In some companies, the budget process is enlightening and the resulting budget puts some guardrails in place to help them stay on the right track for the coming year.

In many companies, the budget is more about "spreadsheet magic" and doing what I like to call the "budget dance".

The budget dance is when the management team goes back and forth and eventually does what it takes to make the budget acceptable to the boss (regardless of achievability).

Oftentimes this includes spreadsheet magic which is where key assumptions are changed to get the bottom line that the boss wants to see (even though everyone knows the revised assumptions are not achievable).

The test of the usefulness of your budget is how tightly it is aligned with reality. You need to ask each person on your management team to rate the achievability of the budget. Look them in the eye and get an honest response.

Don't allow them to give you the "no honey, that shirt doesn't make you look fat" kind of answer. J

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10/07/2013

Do you use checklists routinely in your work? I'd say most people would answer that question with a no.

The Checklist Manifesto, by Atul Gawande, is a very insightful look at how a simple checklist saves lives in hospitals. And how the principles can be used in almost any business.

Every flight you have ever been on included the pilot going through a series of checklists before you ever left the ground. It is a form of professional discipline built into the process of flying an airplane.

But checklists are not widely used in business. Partly because you might consider them to be rigid. You might be concerned that they remove the ability to make changes on the fly.

Here is a quote from the book:

"Discipline is hard – harder than trustworthiness and skill and perhaps even than selfishness. We are by nature flawed and inconstant creatures. We can't even keep from snacking between meals. We are not built for discipline. We are built for novelty and excitement, not for careful attention to detail. Discipline is something we have to work at."

There are certain processes in every business where discipline, and the use of a checklist, could reduce errors.

It could help get the job done right the first time. It could help reduce customer complaints and a whole host of other benefits that come from better execution throughout the business.

"Even the most expert among us can gain from searching out the patterns of mistakes and failures and putting a few checks in place. But will we do it? Are we ready to grab onto the idea? It is far from clear?"

Take a minute and write down something in your business that is bugging you because it is not functioning properly or consistently. Then consider whether a simple checklist might help improve the process.

Who knows, maybe pilots are even smarter than we thought!

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